GoPro May Give the iPhone a Dangerous Ride

While software may be eating the world, it's the smartphone that has eaten personal consumer electronics. Simple flip phones, PDAs, music players, cameras: each of these is simply an app on a smartphone.

Moreover, smartphones themselves are increasingly becoming commodities from a hardware perspective. To be sure, there are still major differences between high- and low-end models, particularly in fit-and-finish, but from a pure performance perspective you can buy quite a lot for not very much. In this respect smartphones are simply following the usual hardware price curve; there is a reason that hardware companies have traditionally traded at a much lower premium than software companies.

It's in this environment that extreme-sports camera maker GoPro has filed for a $100 million initial public offering. The action-camera maker reported just under $1 billion in revenue for 2013, with a net income of $50.6 million, both nearly double the 2012 numbers (although the first quarter of 2014 was down, year-over-year). It was a welcome respite from the loss-making software-as-a-service companies that have dominated the tech IPO scene as of late. That's the great thing about hardware: You are selling on a transactional basis, and there is a nice connection between the top and bottom lines.

Still, though, GoPro's prospectus referenced the same risk factors I alluded to above:

Smartphones and tablets with photo and video functionality have significantly displaced traditional camera sales. It is possible that, in the future, the manufacturers of these devices, such as Apple Inc. and Samsung, may design them for use in a range of conditions, including challenging physical environments, or develop products similar to ours. In addition to competition or potential competition from large, established companies, new companies may emerge and offer competitive products. Further, we are aware that certain companies have developed cameras designed and labeled to appear similar to our products, which may confuse consumers or distract consumers from purchasing GoPro products.

GoPro is particularly at risk, given its second risk factor: "We depend on sales of our capture devices for substantially all of our revenue, and any decrease in the sales of these products would harm our business." So is GoPro another Flip, the handheld video camera that imploded under Cisco's management as smartphones took over?

I don't think so; in fact, not only is GoPro's strategy compelling, it's a potential model for not just hardware companies, but content companies to emulate. Specifically, GoPro is spending significant amounts of money to build a thriving content business for the purpose of differentiating its hardware, preserving its cameras' viability as a standalone object with attractive margins. Returning to the S-1 (emphasis mine):

We believe consumer demand for compelling content combined with GoPro's self-capture technology and the explosive popularity of social media create a significant media opportunity for GoPro. GoPro programming has developed a dedicated and growing audience. To continue to scale this audience, we have built a team of production professionals who regularly produce content based on inspiring stories from around the world, captured exclusively with our products. In addition, we actively curate and redistribute, with permission, our customers' most compelling content as GoPro-branded content. We believe GoPro is well-positioned to become the first media company whose content is captured exclusively using its own hardware. To date, the GoPro Channels on YouTube, exclusive of our customers' own shared content on their personal YouTube channels, have generated over 450 million cumulative video views.

GoPro's focus on content is not about diversifying away from hardware; rather, it is this content network that provides the margin for said hardware. After all, the price of entry for consumers, both to brand affiliation and to the content communities GoPro is fostering, is a camera that costs hundreds of dollars.

In this way, GoPro is actually a bit like Apple. Apple makes beautiful hardware, to be sure, but it is the software and all the other aspects of the Apple experience (retail stores, iTunes, brand affiliation, etc.) that provide the differentiation that justifies vastly higher profit margins than other hardware makers. From a business model perspective, GoPro and Apple are hardware companies, but when it comes to differentiation and maintaining margins, it's everything else that matters most.

In the long run, if GoPro is successful, its strategy could be applicable not only to other hardware companies, but to content companies as well. Content is famously hard to monetize in the digital era, given its zero marginal cost, but making that content exclusive to tangible hardware would likely significantly increase the willingness of customers to open their wallets. A $100 million IPO is by no means big, but the implications of GoPro's success or failure could be significant for more industries than you might think.

To reach the writer of this article: Ben Thompson at benthompson@stratechery.com.

To reach the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

Ben Thompson is the founder of Stratechery.com, a member-supported blog focused on the business and strategy of technology. He has worked at Apple, Microsoft and Automattic. He lives in Taipei, Taiwan.
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